The British Pound (GBP) experienced a decline against the US Dollar (USD), with the GBP/USD currency pair plunging to near 1.2300. This drop comes as traders react to the news that President Donald Trump plans to direct federal agencies to review tariff policies. The currency pair had previously risen by 1.35% on Monday, but recent developments have shifted market dynamics significantly.
President Trump made a last-minute adjustment to his approach, stepping back from initiating broad, sweeping day-one trade tariffs. This decision has left investors speculating about the potential inflationary pressures that could arise under his administration's policies. As a result, the US Dollar Index (DXY) trades around 108.30 after trimming its recent gains. Concurrently, US Treasury yields for 2-year and 10-year bonds remain subdued at 4.23% and 4.54%, respectively.
The British Pound has also shown weakness against other major currencies, notably being the weakest against the Japanese Yen. The Pound experienced some strengthening as demand for UK gilts rose, driven by weaker-than-expected UK Retail Sales data for December. Monthly Retail Sales contracted by 0.3%, adding to the economic uncertainty.
Amid these developments, analysts at Oxford Economics predict that the Bank of England (BoE) may cut interest rates by 100 basis points (bps), potentially bringing rates down to 3.75% by year's end. This forecast reflects concerns about the UK's economic outlook following the disappointing retail sales figures.
In contrast, traders anticipate that the US Federal Reserve will maintain its current borrowing rates within the range of 4.25%-4.50% over the next three policy meetings, according to the CME FedWatch tool. The Fed may limit itself to just one additional rate cut due to potential inflationary pressures stemming from President Trump's economic policies.
As the markets continue to react to these developments, it is crucial to note that neither FXStreet nor the author of this report are registered investment advisors. This article does not constitute investment advice and should not be interpreted as such.